Buying Stocks for a Dividend Growth Portfolio: Part 1b Looking Forward

The quality is remembered long after the price is forgotten.

Time in the market beats timing the market.

Building a portfolio is different from buying a stock.

Compound away the purchase price.

A race can only be won at the finish line.

The subsequent postings discuss 39 stocks that are currently in the portfolio and a number of others that have, at various times, been considered as portfolio holdings. Not surprisingly, and perhaps inevitably, some of them are overpriced right now. So, a logical question is: why is it often appropriate to make small purchases of them anyway? Even if one intends to let dividends compound for 20 or 30 years while holding the stock, the stock can probably be bought at a later point at a lower price earnings ratio. The reason is quite simple. The price earnings ratio may be lower, but if earnings have gone up in the interim, the price need not be lower.

Further, one may have to wait quite a while for what would appear to be a more advantageous entry point. In many cases, that involves forgoing the earnings and dividends in the interim, and those earnings and dividends compounded over 30 years will more than compensate for any overpayment in the initial purchase. The rate of return may be improved by waiting for the perfect entry point, but that return will be earned over a shorter period of time. Consequently, the total amount held at the end of the 30 years may be smaller.

To illustrate with a stock that is currently overpriced: recently someone asked me what I paid for Johnson & Johnson. I indicated “it was long ago and I don't remember,” and I don't. After a long period of holding with dividends being reinvested, the current dividend from Johnson & Johnson is now more than what was initially invested. (That is true even without the conviction buy discussed in a subsequent posting). More than likely the dividends that were earned by not waiting to make a purchase have compounded to a level that is much greater than any price advantage that might have been achieved by trying to time the initial purchase. The initial purchase price seems totally irrelevant when compared to owning a quality company over a long period of time and letting the gains compound. The same situation probably exists with almost all of the stocks in the 10 stock portfolio which are the stocks that have been held the longest.

Also, keep in mind that one of the objectives is not to have to do much trading. So, the argument that the investor might have held a different stock, or even a different asset, while waiting for the perfect entry point is somewhat irrelevant. Even though these postings discussed buying opportunity, the basic construction of the portfolio assumed the intent to buy the stocks and hold each one for a long period of time. Further, it is unlikely that some of the buying opportunities discussed in the postings would have been noted and recognized without the experience of owning the stocks. After all, we all have families and careers that preclude our constantly analyzing investment opportunities. There is little doubt that I'm currently missing similar opportunities in numerous stocks that I don't follow. There can only be so many stocks on a watch list.

The subsequent postings discussed opportunistic buys. Generally, they occurred because the stock was of interest due to how it fit in the portfolio. The driving force was the portfolio not the minor opportunities to buy at an advantageous price. For example, the posting on January 24, 2014, “What is to be learned about stock acquisition?” discussed a number of opportunistic purchases as well as some conviction buys. Some of the opportunistic buys resulted from a desire to bring a particular holding to a level that met the dividend flow objective for each holding in the portfolio. For example, additional shares of Exxon were bought in 2013 at a price below where it was for a number of years after that. It wasn't the lowest price possible as Exxon is currently at a slightly lower price, but it allowed the dividends from Exxon and the other stocks to be accumulated and used to expand the portfolio.

Thus, the dividends from the portfolio and proceeds from the sale of mutual funds that had been used as a parking lot for investment until better opportunities could be identified could be used to expand the portfolio when opportunities to make conviction buys arose in other stocks such as McDonald's and Microsoft.

In many respects, what follows is a core dump of what one investor has learned about over 40 different stocks while buying them to build a dividend-growth portfolio. What is described is not an exhaustive discussion of the analysis of individual stocks. In other postings, there have been discussions of technical analysis and fundamental analysis of individual stocks. This posting takes a different tack and identifies buying signals that an investor can use whether or not they feel comfortable with technical and fundamental analysis. An investor who feels comfortable with either analytical approach may find the discussion useful as a supplement. However, the important point is that a dividend growth portfolio can be built without huge investments in technical or fundamental analysis.